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Unit 2: National Income

Value Added Approach Notes

This method measures contribution of each producing enterprise to production in the domestic
territory of a country in an accounting year. According to this method net value added at factor
cost by all the producing units during an accounting year within the domestic territory is
summed up. This gives us value of net domestic product at factor cost or domestic income.

Steps Involved

1. Identifying all the producing units in the domestic economy and classifying them into the
industrial sectors such as primary, secondary, tertiary sector on the basis of similarity of
activities.
2. Estimating net value added at factor cost by each producing unit deducting intermediate
consumption, depreciation and net indirect taxes from value of output.

3. Estimating net value added of each industrial sector by summing up net value added at FC
of all producing units falling in each industrial sector.
4. Computing domestic income by adding up NVA at FC of all industrial sectors.
5. Estimating net factor income from abroad which is added to domestic income for deriving
national income.

!
Caution
Imputed rent of owner occupied houses is also included in calculation of national
income.
Imputed value of goods and services produced for self consumption are included.
Value of own account production of fixed assets by enterprises, government and the
households.
Thus according to value added method,
GNP = (value of output in primary sector - intermediate consumption) + (Value of output in
secondary sector - intermediate consumption) + (Value of output in tertiary sector - intermediate
consumption) + Net factor income from abroad.

2.3.2 Income Method

Income Method measures national income from the side of payments made to the primary
factors of production for their productive services in an accounting year. Thus according to
income method, national income is calculated by summing up of factor incomes of all the
normal residents of a country earned within and outside the country during a period of one
year. The income generated is nothing but the net value added at factor cost by factors of
production, which is distributed in the form of money income amongst them. Thus, if factor
incomes of all the producing units generated within the domestic economy are added up, the
resulting total will be domestic income or net domestic product at factor cost (NDPFC). By
adding net factor income from abroad to domestic income we get NNPFC.
GNP is the addition of all factor incomes generated in production of goods and services. While
measuring GDP we must include only those income flows that originate with the production of
the goods and services within the particular time period. The components of factor income are:
(i) Employees' Compensation, (ii) Profits, (iii) Rent, (iv) Interest, (v) Mixed Income, and
(vi) Royalty.

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